“Start Quote

The old normal is not the new normal”

End QuoteMark CarneyBank of England governor

He said: "The big picture is not whether the Bank Rate goes from 0.5% to slightly above that lowest ever level.

"That's not the big picture, the big picture is where interest rates go in the medium term, because if I am taking out a mortgage... and if I am thinking of investing in a new plant, if I'm thinking about taking on new people, that's what I care about."

Mr Carney added: "The guidance we are giving is... the time will come to raise interest rates... but when we raise interest rates we expect to do so in a gradual and limited fashion,"

Constraints

The Bank governor explained the reason for a more gradual increase in interest rates was that rate movements were likely to have a much bigger impact on household spending than in the past.

And he said household debt levels and a fundamentally altered financial system also meant it was virtually impossible to raise interest rates much above 2.5%.

He said: "What I am telling you is that the old normal is not the new normal."

The Bank has announced plans to cap riskier mortgage lending amid fears of a housing bubble

"Normal was a much higher level than we will get to in order to bring the economy back to full employment and inflation at target.

"So the Bank of England [rate], which is at half a percentage point, historically would have moved to somewhere akin to 5%.

"If you look at financial markets their estimation about the next three years is around... let's call it 2.5% - slightly lower or it can be slightly higher - we see that as not inconsistent with returning the economy to where it was before."

Mr Carney added: "Why is that the case? Because things have changed. Households have a lot of debt, the government is still consolidating its financial position, Europe is weak, the pound is strong and the financial system has been fundamentally changed.

Mortgage cap

"[The financial system] has to carry a lot more capital, it has to carry a lot more of what is called liquidity insurance and it will pass on those costs to borrowers.

"And as a consequence of those factors, in order to bring the economy back to full employment, in order to get inflation back to target, the new normal is materially lower than the old normal."

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